Long-term investors usually buy based only on company prospects and valuation, but sometimes a growing company combined with high short interest provides a springboard too tempting to ignore. The high number of shares sold short makes SodaStream (NASDAQ:SODA), Green Mountain Coffee Roasters (UNKNOWN:GMCR.DL), and Deckers Outdoor (NYSE:DECK) prime contenders for the best contrarian bet in 2014.
The trend is SodaStream's friend
SodaStream's stock price plunged after analyst estimates for its third-quarter results proved too optimistic. Concerns that the company's U.S. sales -- its key growth market -- were slowing seemed to be confirmed by the poor quarter. Bears are now piling into the stock; nearly half of its float is sold short.
SodaStream touts its razor/razor blade model: It sells the device once and generates recurring revenue through gas refills and flavor packets. There are numerous third-party refillers, but SodaStream's refills are the most widely available and have the best brand exposure. Therefore, the company believes it can generate recurring revenue from a growing customer base.
The key to SodaStream's appeal in the U.S. is not the cost-advantage or taste -- neither attribute is particularly compelling relative to Coke and Pepsi -- but rather the environmental impact. SodaStream's advertising focuses on the millions of aluminum cans and plastic bottles that are hauled off to landfills as a direct result of Coke and Pepsi consumption. The company's environmentally friendly product is on the right side of the trend toward eco-friendly products.
My take: SodaStream will never capture a large share of the carbonated soft-drink market, but it does not have to. The company is riding the eco-friendly trend and will continue growing at a high rate for many more quarters. At 24 times earnings, this is not a value pick. But it may be a rare high-multiple contrarian pick.
Green Mountain Coffee Roasters fends off billionaire hedge fund manager
At last count, about one-third of Green Mountain's float was sold short. Bears are concerned that competition, especially from Starbucks, will soon devour Green Mountain's excess profits.
If nothing else, Green Mountain is doing its best to goose its stock price. After disclosing its fourth-quarter results, the company announced a $1 billion share repurchase plan and a $0.25 per share quarterly dividend. Moreover, insiders bought more than $1.5 million in stock on the open market at the end of November -- a sign that management is bullish on the company's prospects.
Despite the company's bullishness, notable short-seller David Einhorn remains short the shares, arguing that Starbucks and other competitors will eventually undercut Green Mountain in a vicious price war. Yet Green Mountain continues to ink deals with Starbucks, Panera Bread, and other would-be competitors that allow the companies to manufacture and distribute their own k-cup brands. This despite Starbucks having launched Verismo, its answer to the Keurig Brewer.
My take: For the time being, Green Mountain will continue to generate out-sized profits due to the popularity of its Keurig brewer and its attendant k-cups. However, investors should wait for confirmation of a durable competitive advantage -- one that keeps rivals from stealing market share -- before taking the plunge on Green Mountain shares.
Deckers Outdoor is a one-product wonder
If you think faddish, one-product companies make great shorts, you must not have been around for Crocs. Deckers relies on its UGG brand for 58% of its sales. This excerpt from the company's most recent 10-K filing sums up the short thesis:
While our UGG brand has experienced strong sales levels over the past several years, UGG brand sales declined in fiscal year 2012 compared to fiscal year 2011. UGG products include fashion items that could go out of style at any time and competition for the sale of products by the UGG brand is intense and has increased over time. UGG products represent a majority of our business, and if UGG product sales were to decline further or fail to increase in the future, our overall financial performance and common stock price would be adversely affected.
UGG is a faddish brand that may be going out of style. Of course, people said the same thing about Crocs and somehow people still buy more than $1 billion worth of Crocs each year. So far, the shorts have been blown out of the water; Deckers' stock has doubled in price since the beginning of 2013. If the stock price continues moving higher, the shorts will be forced to capitulate.
My take: Predicting fashion trends is a difficult task. Unless you have a special nose for trends, it is best to sit it out as the stock already trades at a rich 29 times earnings.